Rates hit new low: Time to refinance?

The holidays are likely to be a little more cheery at Kevin Coughlin's home. Coughlin refinanced the adjustable-rate mortgage on his Shorewood house this week into a 30-year fixed-rate mortgage that's going to save him $200 a month.

"It takes the pressure off the cash flow," he said, speculating about how he and his family might benefit from the savings. "Whether it's groceries or the ability to eat out one more time each month -- before, you weren't going to do it."

Nationally, mortgage rates fell to an average of 5.19 percent, the lowest level in 37 years, according to a weekly survey released Thursday by Freddie Mac. Some lenders were reporting even lower rates, and area mortgage lenders say applications are pouring in.

It's too soon to say what effect the rates will have on the moribund real estate market. The most immediate beneficiaries appear to be homeowners hoping to swap their adjustable-rate mortgages for fixed payments.

"This is nearly a historical and probably unprecedented opportunity," said Keith Gumbinger of HSH Associates, a financial publisher in New Jersey.

Not everyone will be able to latch on to the lower rates. Homeowners whose property values have fallen may not have enough equity to qualify for the lower rates, and lenders are scrutinizing applications more closely now than during housing's go-go years earlier this decade.

The decline in mortgage rates comes after aggressive moves by the Federal Reserve aimed at propping up the U.S. housing market. On Tuesday, the Federal Open Market Committee lowered a key interest rate, and last month the Fed said it would buy $600 billion in mortgage-related securities and other debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan banks.

The latest rate decline is unlikely to revive the ailing housing market. According to the most recent survey by the Mortgage Bankers Association, refinancings represented almost 77 percent of all mortgage applications at the end of last week.

Buying a house is a much more complicated process than simply refinancing, and many prospective borrowers aren't feeling confident enough about the economy to make a big financial commitment, said Ken Johnson, vice president of the Coldwell Banker Burnet office in Minnetonka.

But a refinance boomlet is also good news for the broader economy. Millions of homeowners still have costly adjustable-rate mortgages. With access to credit tightening, rates on consumer loans rising and the value of equities falling, the opportunity to lock into a fixed-rate mortgage and to reduce payments could relieve pressure on some household budgets.

On a $200,000 mortgage, for example, a shift from 6.25 to 5.25 percent interest can save more than $100 per month.

"The recasting of debt could mean many billions of dollars let loose in the marketplace to support a very leaky economy," said Gumbinger, who said that on Wednesday, 30-year, fixed-rate mortgages had fallen to 5.06 percent interest, the lowest since the 1960s.

Likewise, a flurry of refinancing could help financial institutions that are saddled with risky mortgage debt by getting those loans off their books and freeing cash for other kinds of loans.

Already, loan officers are saying that their phones are ringing off the hook, mostly with people who want to refinance.

"I'm swamped with calls," said Randi Livon of Residential Mortgage Group in Minnetonka. She said that by noon yesterday, she had nearly 35 phone messages awaiting her. John Skoglund, a mortgage banker with Burnet Home Loans, said that he locked in 20 loans yesterday.

Unfortunately, many callers have no equity or owe more than their home is worth. "Their values just aren't there, and these are people who are working two to three jobs to make their payment," said Livon.

With the support of the federal government, Gumbinger said, it's likely that the historic low rates could linger.

"That support is not going away," said Gumbinger. "The federal government is not like the private market that has to turn tail and run when things get ugly."

Jim Buchta • 612-673-7376